Congress is working on bills to change how private student loans are canceled through bankruptcy. Under current law, it is easier to forgive gambling debt than student loan debt.
Many college graduates fall in debt that simply cannot be repaid, and filing for bankruptcy may seem like a good option in desperate times. While this could eliminate things like credit card balances, canceling a private student loan under current law requires proof of “undue hardship,” an ambiguous term that has not been consistently applied, according to the Chronicle of Higher Education.
The bills would rightfully eliminate this requirement. Debt acquired in pursuit of higher education should be treated the same as other private debt.
“Why should student loans be treated differently?” Rep. Danny Davis, D-Ill., said to the Chicago Defender. “Private education debt is no different than other consumer debt. It involves private profit and deserves no privileged treatment.”
In fact, this “privileged treatment” was only given to private lenders in 2005. Federal-backed student loans cannot be forgiven through bankruptcy. Private lenders, such as banks, originated those loans and the government subsidized them to keep interest rates low, then reimbursed lenders when students defaulted.
The bills in Congress will not affect federal-backed loans, which were eliminated by Congress earlier this year in favor of direct loans from the federal government. After July 1, 2014, repayment of these federal loans will be capped at 10 percent of discretionary income and could be forgiven after 20 years.
Private student loans are originated by banks and don’t have the advantages of federal loans. Interest rates can reach double digits and are double or triple the rates of federal loans, according to the Chronicle.
“Private student-loan borrowers are often unable to work out terms that ensure a reasonable and fair payment schedule,” Rep. Hank Johnson, D-Ga., said during a House subcommittee meeting Thursday.
Private loans were offered the same bankruptcy protection as federal loans in 2005 because bank owners argued it would allow them to lend to more students, especially low-income students. But Democrats now argue that banks made too many risky loans.
These loans should be grouped with debts like mortgages and gambling, not with debts that require proof of undue hardship, a category that includes alimony, child support, overdue taxes and criminal fines.
Bankruptcy comes with its own setbacks, but it should be an option for students with private loans.